The argument could be made that frack sand suppliers have been some of the hardest hit companies in the oil and gas sector over the past couple years. Hi-Crush Partners (NYSE:HCLP) most recent earnings was evidence of this as production volume, sand prices, and profits all continued on their downward trend. What is surprising, though, is that management was rather upbeat about the future of the company even though the results would indicate otherwise. Let's take a look at Hi-Crush's most recent result and why management sees a better future for the company thanks to some recent moves.
By the numbers
|Results (in millions, except per share data)||Q2 2016||Q1 2016||Q2 2015|
|Earnings per share||($0.26)||($1.39)||$0.31|
|Distributble cash flow||($6.2)||($13.8)||$16.6|
If there is one number that completely describes the woes of Hi-Crush Partners, its the company's margin per ton of sand sold. Even this time last year was not a great one for sand suppliers, but its per ton margin was $20.67. This quarter, that margin fell all the way to $1.97. Basically, the cash costs for producing and delivering a ton of sand is greater than what Hi-Crush can sell that sand for today. It doesn't take a rocket scientist to realize that this is not a sustainable track for the company.
The (not so) highlights
There isn't a whole lot that Hi-Crush can do about low oil prices or low sand demand, but one thing it can do to help alleviate pricing pressure on sand volumes is cut back production to alleviate the glut of sand on the market. Compared to this time last year, total sand volumes have declined 29% and sand production has declined even more.
On the flip side of this strategy, those lower sand production volumes are also leading to lower contribution margins for its sand. It's arrived at the point where the company's fixed costs are eating heavily into the company's profit margins. If production levels were to decrease any further, we would likely see those contribution margins slip into a loss per ton sold.
The one thing the company needs more than anything else is an uptick in demand from oil and gas producers. Unfortunately, it doesn't look like we are going to see sand prices improve any time soon. A couple of companies have added rigs for the second half of the year, but it will take some time before a couple added rigs translates to more completion work that drives sand demand.
If there is anything positive to say about this most recent quarter, it's that the company reduced its debt loads such that will be able to live to see a few more quarters. In the second quarter, the company did two separate share issuance's that netted a total of $101 million. The proceeds from these two issuance's were used to lower the company's long term debt load by $54.5 million and increased the company's cash position from $10 million at the end of the prior quarter to $39 million. It's not much, but it should be enough to at least cover operational cash burn and capital spending for the rest of the year.
From the mouth of management
The results weren't great for Hi-Crush, but management seemed rather upbeat that it was able to keep its contribution margin in the quarter. The other reason that the company remains positive is, according to CEO Robert Rasmus, that the market can't continue like this forever.
We continue to see some frac sand producers selling sand at what we consider to be unprofitable and unsustainable prices, even for those with industry-leading cost structures. As demand for sand picks up, we expect to see pockets of short supply, which will help shore up pricing, moving to overall tight supply as demand increases with greater completion activity and sand intensity. We are operating on a much leaner, more efficient platform than we were prior to the downturn or even just a few months ago. As prices increase, we believe there is significant upside over the current contribution margin levels for Hi-Crush with our lower than $15 per ton production cost. We believe that the eventual recovery in sand pricing is driven by the long-term fundamentals for frac sand that remained strong, and we're encouraged that supply demand balances appear to be improving. We've all heard in recent months and more recently on the latest round of earnings calls, that more sand used per stage and per well equates the better well results. We have corroboration of that statement from recent pronouncements from E&Ps like Pioneer [Natural Resources] and Matador [Resources]. While this message is more prevalent today than even just a few months ago, we are still in the early innings of this trend.
What a Fool Believes
The most important thing for Hi-Crush Partners in the coming quarters is to buy time until the market frack sand picks back up again. The company's operational results aren't doing it any favors right now, but those two shares issuance's and cutting its cash outflows should help get it through a few more quarters before having to make any more drastic moves. For investors, this isn't exactly the most appealing news right now. Considering the amount of time it will likely take before the market rebounds, it's probably best to sit on the sidelines for a while until the company has a more solid footing.